Juan Francisco Torres Landa
Hogan Lovells BSTL
View from the Top

Efficiency, R&D to Determine Profitability

Fri, 09/01/2017 - 14:41

Q: How could the economic environment encourage new mergers between large automakers?

A: Consolidation in the industry is possible and has existed for the last 10 to 20 years. If we compare the number of independent companies that existed before the conglomerates that have formed over the years, there are now five or six big groups managing most brands in the market. Further consolidation may occur but it is a difficult process. For competition purposes, antitrust authorities will block consolidation efforts that could potentially result in a player being too big. The groups we know today are already large, so any new mergers could only be between two or three players, creating a similar union to those already participating in the market.

FCA is a natural candidate for this kind of process, considering it is not the same size as Toyota, GM or Ford. The situation resembles that of Nissan and Renault before they joined forces. The companies realized they could not compete by themselves but combined they could be much more efficient. Over the years there have been some mistakes, such as the consolidation of Daimler and Chrysler. FCA is seeing more success today but it still struggles to compete against the market leaders. Aside from antitrust issues, large companies like GM and Ford must make sure they synchronize their geographical footprint, product portfolio, pricing and technology before delving into a potential merger.

Q: What role will technology play in the industry’s evolution and the integration of different companies?

A: The industry has learned from its mistakes but we will see what changes arise with the new administration in the US. There are SMEs that have managed to remain afloat, targeting a specific niche with higher margins. But the most profitable companies in the years to come will be the most efficient and those that invest heavily in R&D.

We will see more changes in the automotive industry within the next five years than we have seen in the last century. Driverless cars, automation and digitalization will be part of the new automotive industry and this will mean a race against time to incorporate the latest technologies. Companies with the resources to integrate developments will prosper and stay ahead of the market while the rest will disappear or fight just to survive. It is no coincidence that companies such as Google, Apple, Yahoo and others are investing in forming joint ventures with large automakers or small technology- development companies. This is an indication of how the industry will transform over the next few years.

Q: What factors do most companies consider to remain competitive?

A: Relying on traditional methods and previous ideas of transportation will be the downfall of certain companies. Even clients’ mindsets and the reasons they buy a car are different today. Over the next five years, there will be fewer incentives to own a car, or at least the market will discourage private ownership. Self-driving cars will serve the same purpose as two or three cars, leading to a drastic change in the industry since companies will not have to sell as many cars as they do now. Traditional business models will be discarded as demand drops between 50 and 70 percent and competition will be even more important as customers choose companies based on service quality.

Companies are currently worrying about trade barriers and the future of NAFTA but the real threat for the industry is technological change and challenges. Focusing on temporary issues is distracting us from the bigger picture. Corporations must be ready for when driverless cars become just another transportation method. Insurance, for example, will change dramatically in deciding who is responsible for an accident when there is no driver to blame. Premiums will have to change and risk allocation will be completely different with no human factor involved. Theoretically, accidents will reduce dramatically with this new technology but there are bound to be problems that must be ironed out as the new rules begin to be implemented.